Grace Chou and Jiselle Ong
To carry out the supervisory functions of the audit committee and take into account the protection of the rights and interests of minority shareholders as well as the stable operation of a company, the Financial Supervisory Commission of Taiwan (hereinafter, the “FSC”) pre-announced on August 22 of this year (2022) the draft Amendments to Articles 14-4, 14-5, and 178 of the Securities and Exchange Act (the pre-announcement period began on the date of announcement until September 21). The relevant provisions are briefly explained below:
I. The right to sue directors, the right to convene shareholders’ meetings, and the right to represent the company when the directors transact with the company for themselves shall be subject to the decision of the audit committee in a collegiate manner (Article 14-4).
According to the FSC’s draft Amendments, regarding the vesting of the right to represent the company in a lawsuit between the company and a director, since a lawsuit against a director should be discussed comprehensively in a collegiate manner to avoid abusive lawsuits, the draft Amendments provide that a lawsuit against a director shall be decided by the audit committee in a collegiate manner. In addition, an independent director of the audit committee may independently convene the shareholders’ meeting before the Amendments. In practice, however, there are circumstances where several independent directors of a company have abused the right by separately convening the shareholders’ meetings, causing confusion among the shareholders as to which meeting they should attend and their inability to exercise their shareholders’ rights as well as undermining the normal operation of the company. In light of the above, the draft Amendments changed the requirement regarding the right to convene the shareholders’ meetings by stipulating that the shareholders’ meetings should be convened through a resolution adopted by the audit committee. Furthermore, when a director engages in trading, borrowing, or other legal acts for himself/herself with the company (director’s self-dealing), there is a concern of conflict of interest. To prevent a single independent director from circumventing the examination and prevention of conflict of interest, the draft Amendments changed the requirement regarding the right to represent the company when a director’s self-dealing occurs by stipulating that such a matter shall be subject to a decision by the audit committee in a collegiate manner.
The draft Amendments to the Securities and Exchange Act stipulate that the aforementioned matters shall be subject to a resolution adopted by the audit committee, which will appoint the representative. The audit committee may decide whether such matters shall be handled by a single representative or jointly by the audit committee.
II. If a meeting of the audit committee cannot be convened for a valid reason, the matters to be resolved shall be handled with a special resolution adopted by the board of directors; the independent directors of the audit committee shall indicate their approval or disapproval of the matters specified in a financial report (Articles 14-5 and 178).
In order to avoid the potentially likely scenario in practice that a meeting of the audit committee cannot be convened since there is only one independent director left as a result of the resignation or removal of other independent directors of the audit committee for any reasons, or due to force majeure, the FSC added the requirement in the draft Amendments, to prevent the financial operation of a company from being affected, that in the event that a meeting of the audit committee cannot be convened for justifiable reasons, the matters set forth in the subparagraphs of Article 14-5, Paragraph 1 shall require the approval of two thirds of all the directors of the board. In addition, since the independent directors of the audit committee should give their opinions on the approval or disapproval of the matters specified in the annual and semi-annual financial reports in their capacity as members of the audit committee, corresponding provisions are added to the draft Amendments for the sake of clarity.
Moreover, to fulfill the administrative objective of urging relevant operators to thoroughly implement corporate governance, the FSC has added relevant penalty provisions to the draft Amendments. In case where a meeting of the audit committee cannot be convened for proper reasons, if the company fails to review the matters set forth in the subparagraphs of Article 14-5 via a special resolution adopted in a board meeting, or the independent directors fail to issue their opinions on the approval or disapproval of the matters specified in the financial reports, the FSC may impose a fine of NT$240,000 to NT$4,800,000 along with an order to demand rectification within a specified period, and such a fine may be imposed consecutively in case of failure to make the rectification within the specified period.